Informal remittance systems have historically been intricately integrated into the socio-economic structure of South Asia over a long period of time. In the 1950s and 1960s, the predominant methods of conducting financial transactions in the Indian subcontinent included Hundi, Chiti, and Hawala. Now-a-days this method of transferring money is most popular among the migrant workers in the labour importing countries. Hundi functions through several phases and entirely bypasses formal banking channels. Initially, a migrant worker abroad hands over their hard-earned foreign currency to a local Hundi operator in the host countries. Then a domestic money launderer or illicit buyer inside Bangladesh pays an equivalent amount of BDT to the Hundi operator’s local agent. Finally, the domestic agent transfers money directly to the migrant worker’s family. In this way, the foreign currency does not enter Bangladesh and is not included in the current account of balance of payments.
Several studies reported different estimates of share of Hundi in Bangladesh. This share ranges between 22% to 56%. However, it is very difficult to estimate exact share of Hundi as it operates in underground. The official statistics of inward remittances during Covid-19 pandemic cast doubts on the available estimates of the shares of Hundi in Bangladesh. Global remittances dropped by 20% while Bangladesh experienced the opposite, a rise in the remittance flow. Migrant workers from Bangladesh declined by 69% in 2020; however, remittance inflows at the national level witnessed a growth of 18.5 % in 2020. Studies show that at the household level, remittances did not increase as workers in the host countries lost their jobs or were furloughed and, in many cases, were paid partially. Surprisingly, the official figure was inflated as a result of more remittances sent through the formal channels. Arguably, this mismatch might be due to the strong presence of Hundi. During the pandemic, because of social distancing and lockdown, the Hundi system could not operate well. So, migrant workers were pushed to send money through the formal channels. There might be demand-side effects as well. One of the main motives of the Hundi is to use for trade misinvoicing and money laundering. During the pandemic period, there was a slowdown in international trade, thereby demanding less Hundi service.
Although Hundi is illegal, because of the advantages of this system over the official channels, remitters opt for this option. High transaction costs lead migrants either to reduce remittances or to shift to informal channels. There have also been other multiple drivers behind this system. Better exchange rates, faster delivery, lack of documentation requirements also encourage remitters to use informal channels. Moreover, formal remittance services are perceived as slow. Delays and lack of convenience create a competitive disadvantage for banks compared to hundi operators.An informal channel allows remitters to avoid bureaucratic or institutional complexity. It also relies on trust-based networks, community norms, convenience and reliability. Another advantageis the accessibility in rural/remote areas�"door-to-door service is also available.
Legal and socioeconomic status of the remitter in the host country has a bearing on the use of informal channels. Undocumented migrant workers, less-educated senders, and those who stay longer abroad are more likely to send remittances through informal channels. On the other hand, female migrants, wealthier households, and those with training or better financial literacy are less likely to use informal channels.
By operating outside formal institutions, Hundi obscures the true volume of remittance inflows, thereby constraining effective economic planning and policy formulation. It also paves the way for criminal activities like tax evasion and capital flight, financing of criminal networks, overseas asset purchases by politically connected actors, and movement of undeclared money. With the significant presence of Hundi, foreign exchange reserves dwindle that distorts the foreign exchange market, causing unexpected volatility in exchange rates. Shortage of foreign exchange impedes imports of essential capital goods for industry and necessary consumption items. Hundi also takes a heavy toll on the formal financial institutions through lower deposits, reduced investments, weakened liquidity, and declining confidence in banks. It enables money laundering and illicit finance such as drug trafficking, corruption, terror financing, and trade misinvoicing�"under and over-invoicing. Heavy reliance on informal remittance systems can reduce remittance inflows through banks and other financial institutions, limiting deposit growth and financial sector deepening.
However, mare cash incentive will not stop the practices of Hundi unless
a concerted effort is made to curb the practice. With the technological
improvement in financial services, now it is easy to send money, and in
many cases Hundi agents do not visit to the migrant workers’ houses
rather deposit the money in mobile banking account or bank account.
To attract larger volume of remittancesthrough formal channel, in July 2019, a 2 per cent cash incentive was offered on the remittances sent through the formal channels. Sending foreign remittance worth of $1,500 or equivalent currency did not require any documents to receive incentive. Beyond the threshold, some documents required such as passport copy of expats, appointment letter, certificate given from Bureau of Manpower, Employment and Training (BMET) and copy of trade licence in case of remittance generated from business proceeds. Bangladesh banksincreased the no-document-required threshold of remittances to USD 5000 in May 2020. In December 2020, this threshold further increased to above USD 5000. The incentive rate was increased to 2.5 per cent in January 2022. Studies show that migrant workers do not want to show the legal documents to send money and thereby choosing Hundi has become popular option among them. Even, it is very hard for the undocumented workers to present documents for sending money. Therefore, introduction of document less transfer has positive bearing on remittances through formal channels.
However, mare cash incentive will not stop the practices of Hundi unless a concerted effort is made to curb the practice. With the technological improvement in financial services, now it is easy to send money, and in many cases Hundi agents do not visit to the migrant workers’ houses rather deposit the money in mobile banking account or bank account. During my staying in Australia, I interviewed several Hundi agents, mostly ethnic shop, and students who transferred money form Bangladesh through Hundi. The Hundi agents in Australia confessed that if the demand for money laundering is less in Bangladesh, the demand for sending money from Australia is also less. In case of money laundering in Bangladesh, the spread between the rates of exchange in Bangladesh and Australia is higher and the currency dealers make more profit. Students conveyed that they transferred money through people of law enforcing agency. Even, transferring money is open secret that they even did not dare to issue money receipt.
With the penetration of technological innovation, the traditional Hundisystem is also being integrated with the cryptocurrency system, where cryptocurrencies are used to bypass banking regulations. Therefore, enacting a draconian law and ensuring its strict implementation can rein in the unbridled practice of Hundi in Bangladesh.At the same time, lowering migration cost and ensuring safe and regular migration will attract more remittances through formal channels.
The writer is Head, Department of Economics, Dean, Faculty of Social Sciences, Jatiya Kabi Kazi Nazrul Islam University, Mymensingh
